Panama Canal contractor threatens to down tools

A massive row has erupted over $1.63bn (£991M) in cost overruns on the Panama Canal expansion project, threatening to derail the scheme’s completion.

At the end of December, Grupo Unidos por El Canal (GUPC), the contractor building the locks portion of the project, said it would stop work on 20 January if client the Panama Canal Authority (ACP) fails to pay for the increasing costs.

GUPC - composed of Spain’s Sacyr Vallehermoso, Italy’s Salini Impregilo, the Netherlands’ Jan De Nul and Constructora Urbana of Panama - won the design/build contract for the locks work in July 2009. GUPC’s £1.9bn bid was the only one of the three that was less than the ACP’s allocated cost of £2.12bn.

According to the contractor, that amount has ballooned due to unforeseen issues beyond its control.

To avert a crisis, Spanish and Panamanian government officials have held meetings with both the parties to find a solution.

As a result ACP and GUPC have agreed to seek a joint solution to the situation.

Both sides described the first meeting on 7 January, as an important “first step”. ACP presented a proposal that would provide GUPC £78M in short term funds, provided the threat to stop work was lifted and other conditions were met. GUPC initially responded by saying it required at least £243M before revising its figure up to a minimum of £608M.

ACP administrator Jorge Quijano said the demand was “completely outside the contract and it’s not going to happen”.

When complete, the 427m long, 55m wide and 18.3m deep locks - one set each at the Pacific and Atlantic ocean ends of the canal - will double the capacity of the historic waterway.

ACP has repeatedly insisted the contractor follow a three-step, dispute-settlement process that involves a review by the ACP, an evaluation by a dispute adjudication board and a ruling by the International Chamber of Commerce in Miami.

To date, GUPC has filed 13 claims, in total valued at around £850M. It has also reported 89 intentions to claim that have not been formally initiated. Most of the claims are still under consideration at some point of the adjudication process.

GUPC officials say the arbitration process has become overly burdensome as ACP routinely rejects every claim, forcing the consortium to bear the growing cost overruns while the process continues. GUPC said that insisting it must bear the cost of problems it claims are caused the ACP is unrealistic given the scale of the project.

“The position taken by ACP can only be explained by the inexperience of canal authority managers in carrying out work of this size and complexity,” GUPC officials said in a statement.GUPC alleges that the root cause of the cost overrun is the provision of faulty technical data by ACP to formulate the bid. It specifically pointed to problems obtaining aggregate of sufficient quality to meet the 100 year standard required for the 5M.m3 of concrete in the locks.

All of the 12M.t of aggregate required is being excavated at the site and, GUPC says, the quality levels are far different than what ACP predicted.

The project had already suffered a six month delay to construction when concreting was in its first phase in 2012.

The current dispute began in mid-December last year, when ACP contacted GUPC requesting a response to several issues that were threatening to delay the project. These included a sharp reduction in the contractor’s personnel, a delay in delivering the completed gates and the lack of progress constructing three dams, which are a part of the locks contract. A seven-day deadline to respond was pushed back to 15 January. The contractor had not responded by the time this edition of NCE was published.

On 30 December ACP was notified by GUPC that cost overruns due to “unforseen circumstances” on the project had reached £991M. The contractor threatened to stop work on 20 January unless the canal authority agreed to pay the additional amount.

ACP has been exploring what options are available in case GUPC pulls out of the job. In interviews throughout the week, Quijano has said that ACP has more than £790M available to continue the work with another contractor.

GUPC officials warned that pressing on with a new contractor, would drive up completion costs, affecting the opening date. They said the ACP would also face having to pay damages to GUPC when arbitration of claims is completed.

“A termination of the contract implies not only that the execution cost may double or triple but the new contractor could not guarantee the technical design and operation offered by the GUPC today,” said GUPC director Paolo Moder in a presentation last week.

Then, a senior manager at the project’s programme manager CH2M Hill said that the scheme was still predicted to be open on time despite a slippage of six months in the construction schedule (NCE 26 April 2012).

In the NCE article CH2M Hill programme manager Garry Higdem said that the contracting consortium had admitted it “might not make” the October 2014 construction completion date.

Work on the locks was originally due for completion earlier in the first quarter of this year.

That delay had been caused by “some difficulty” starting the concreting phase. But Higdem said there was enough float in the programme because the client had set aside its 2015 financial year as a “ramp up” period to train the thousands of new workers needed to operate the new locks being built.

Construction of a third shipping lane through the Panama Canal is underway. It involves contractors and manufacturers across the globe working to exacting concrete and design specifications. CJ Schexnayder reports.

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